Penalty
Cases For Failure to Disclose Reportable Transactions Were Not Always Fully
Developed

Issued on December 10, 2010

Highlights

Highlights
of Report Number:2011-30-004 to the Internal
Revenue Service Deputy Commissioner for Services and Enforcement.

IMPACT ON TAXPAYERS

In October 2004, the Internal
Revenue Code Section 6707A (§6707A) penalty was enacted for failure to
disclose a reportable transaction, with the intent of helping to detect, deter,
and shut down abusive tax shelter activity.However, the procedures for documenting and assessing the penalty were
not sufficient or formalized, and cases are not fully developed.These
conditions increase the risk that taxpayers will not receive consistent and
fair treatment.

WHY TIGTA DID THE AUDIT

This audit was initiated to
evaluate the Internal Revenue Service’s (IRS) effectiveness in identifying,
developing, and applying the §6707A penalty.In addition, the Senate Finance Committee has
concerns about whether the penalty amounts are fair when compared to the tax
benefit taxpayers receive from participation in abusive transactions.

WHAT TIGTA FOUND

The §6707A penalty for failure to disclose a non-listed reportable
transaction is $10,000 if the taxpayer is an individual and $50,000
for any other business or entity. If the violation involves a listed
transaction, the penalty is $100,000 for individuals and $200,000 for any other
business or entity.

The §6707A penalty is a stand-alone penalty and does not require an
associated income tax examination; therefore, it applies regardless of whether
the reportable transaction results in an understatement of tax.TIGTA determined that, in most cases, the
§6707A penalty was substantially higher than additional tax assessments
taxpayers received from the audit of underlying tax returns.On July 7, 2009, at the request of Congress, the
IRS agreed to suspend collection enforcement actions.However, this did not preclude the issuance
of notices of assessment that are required by law and adjustment notices which
inform the taxpayer of any account activity.In addition, taxpayers continued to receive balance due and final notices
of intent to levy and pay §6707A penalties.

TIGTA reviewed 114 assessed
§6707A penalties and determined many §6707A penalty files were incomplete or
did not contain sufficient audit evidence.TIGTA also identified instances in which the coordination between the
IRS’s Office of Tax Shelter Analysis and other functions needs
improvement.In addition, although the
Office of Tax Shelter Analysis is responsible for reviewing, analyzing,
disseminating, and reporting on thousands of Reportable Transaction Disclosure
Statements (Form 8886) each year, it does not have formal processing
procedures.

WHAT TIGTA RECOMMENDED

TIGTA made several
recommendations to fully develop, document, and properly process §6707A
penalties.

In
their response to the report, IRS officials agreed with the recommendations and
plan to take appropriate corrective actions.

READ THE FULL REPORT

To
view the report, including the scope, methodology, and full
IRS response, go to: